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AMD Earnings: A Sign Of What's To Come From PCs And Consoles

Chris Lau, Kapitall: AMD earnings impressed but the stock still fell. Can new consoles outweigh the impact of declining PCs?

Stocks often rally strongly ahead of quarterly earnings, in anticipation of good results. Yet even when a company meets expectations, it may not be enough to prevent a sell-off the very next day.

This was the case for Advanced Micro Devices ( AMD ). AMD fell to $3.53 after investors realized that the weak PC sector will continue to drag results.

[Read more about earnings season from Kapitall: 5 Tech Stocks to Watch After Earnings Warnings]

Being the chip supplier for Sony’s (OTC: SNE) PlayStation and Microsoft’s ( MSFT ) Xbox One was the main driver supporting AMD shares. Now that AMD is expecting gross margin to be lower, should investors be concerned?

Weak PC market

CPUs dropped 15% from the previous year, to $790 million. The decline was due in part to declining demand in the PC industry. Competition from Intel ( INTC ) did not help, either. Intel reported healthy margins, while operating profits dropped only 3% to $3.26 billion compared to the previous year.

PC CPU sales did manage to rise by 4% from the previous quarter, while average selling prices were flat. Intel also provided guidance for the fourth quarter, when it expects customers to be cautious with their orders.

AMD sales to improve

AMD forecast revenue in the fourth quarter to rise by 5% from the previous quarter. Gross margin is expected to slip, settling at 35%. The graphics unit was a bright spot for AMD. Sales rose 96% from the previous year, supported by the console market.

As new consoles debut, AMD could benefit – the chip maker shipped millions of units for Sony and Microsoft ahead of the new releases. Demand for the new PlayStation 4 and Xbox One should be strong initially, and is expected to improve as consumers decide to upgrade their gaming entertainment.

Click on the interactive chart to see data over time. Sourced from Zacks Investment Research. 

Weak chip sales to the PC market should not be a surprise. IDC already reported weak shipments before AMD's quarterly earnings.

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